THE GREEN PARADOX Rates Must Be Slowed Down
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Introductory Debate THE GREEN PARADOX rates must be slowed down. The resource owners must be prompted to temporarily leave more carbon underground. HANS-WERNER SINN Professor of Economics and Public Finance, Those convinced that with the brave new technolo- University of Munich; gies proudly displayed in many newspapers’ spe- President of the Ifo Institute for Economic Research cial sections we can avert climate change should specify how they would move resource owners to Environmental policy must be turned on its head: extract less fossil fuel. And that is precisely the instead of mulling over for the thousandth time about sticking point. Politics so far exhibits not the slight- which technical measures can be applied to reduce est glimmer of thinking in this direction. From the carbon dioxide emissions, we should turn to the core Environmental Agency through the Greens to the question of how to induce the resource owners to relevant European Commission there is not a thing leave more carbon underground, as that is the sole on the matter. Even science itself overlooks the possible way to solve the climate problem. issue. Energy models depicting the long-term extraction path of fossil fuel resources do not con- The simple but usually overlooked fact is: other than cern themselves with the climate. Climate-theoret- the useful but limited afforestation efforts, there are ical models, in turn, do not concern themselves only two ways to curb the accumulation of carbon with the extraction of such resources; they are in dioxide in the atmosphere and, with it, slow down fact atemporal models that, by their very nature, global warming. We either temporarily refrain from are not in a position to analyse decision issues that extracting carbon from the ground, or we stuff it have an intertemporal dimension. Only now, back into the ground after having extracted its ener- thanks to the influence of the current German gy. All the technical endeavours to develop alterna- debate, a bit of movement is becoming apparent in tive technologies and all economic incentive systems the model front. to curb the greenhouse effect must subordinate themselves to this fundamental fact. This silence goes hand in hand with the acknowl- edged difficulty of being able to do something in Bringing carbon dioxide back underground is easier this regard at all. What we in Europe and Germany said than done. One third of the primary energy in have set in motion with untold billions invested is the original fuel will be consumed by scrubbing CO2 geared at gradually reducing demand for fossil fuels from the exhaust and subsequently compressing it by developing alternative energy sources and strate- into a liquid. On top of that, the amount of storage gies. The range of initiatives goes from biofuels volume required is gargantuan, as each carbon atom through wind power to better insulating homes and has been joined by two oxygen atoms upon combus- capping vehicles’ CO2 emissions. The measures to tion – and they all need to be stored.Thus, in the case reduce consumption exert an increasingly stronger of anthracite coal more than five times as much vol- downward pressure upon the world’s fossil fuel mar- ume is required as the original fuel occupied under- ket price and dampen the rate of increase in such ground, while in the case of crude oil the proportion prices. is more than three-fold. According to estimates by the IPCC (Intergovernmental Panel on Climate Resource owners regard this development with con- Change), the Earth’s depleted coal mines and oil and cern. They rightly fear the erosion of the rate of cap- gas deposits will offer room for only some 600 giga- ital gains on the resources still in situ, moving them tons of carbon, barely one tenth of the recoverable to react by bringing forward their extraction plans carbon resources (6,500 gigatons). For that reason, if and converting a larger portion of their wealth into we are to curb climate change, carbon extraction cash and securing it as financial capital. They thus CESifo Forum 3/2009 10 Introductory Debate increase their fossil fuel supply when demand for the detriment of generations far in the future finds them decreases. This is the green paradox: environ- neither economic nor ethical justification. What we mental policies that turn increasingly greener over need is a measured green policy that slows down time operate like announced expropriations. They resource extraction and, with it, global warming, but prompt resource owners to try to escape this by the green paradox shows that this goal cannot be accelerating extraction of their fossil fuels, which in achieved with the policies currently in place in turn speeds up the warming of the planet. Europe. The question is then, what brings us truly closer to the goal? Small wonder then that the massive efforts of Europeans have delayed the peaking of the world’s If a steadily greener policy accelerates resource carbon dioxide emissions curve to the future. In fact, extraction, it may be worth thinking about a green they have not been able to cause even the tiniest dip policy that turns to pale green as time goes by. Such in this curve. a policy would exert much higher pressure on prices at the beginning but let up gradually over time, with By saving ever more energy we are raising fears of the effect that world market prices would drop the future among resource owners and leading them quickly to a fairly low level only to rise afterwards at to increase the extraction rate. This has been music a steadily increasing rate. Climate change would be in the ears of Americans, Chinese and all other envi- slowed down, as intended. ronmental sinners. They have enjoyed the resulting lower energy prices and raised their consumption by But that is unfortunately only a theoretical solution even more than we have reduced ours. that is well nigh impossible to attain, as a steadily less green policy would have difficulty gaining credibility Some observers pin their hopes on a different effect: among the resource owners. The many proposals that the green policies push the price of fossil fuels in concerning the long-term goals of climate policy the world market so far down that they fall below the made by politicians all go in the opposite direction. extraction costs, making extraction unprofitable. Energy consumption is to be reduced a little at the Demand would then drop, as green policies intend. beginning but with increasing zeal as time progress- This hope is baseless, however, because, like old es. From the G8 Summit at Toyako in July 2008, in Rembrandts, resource prices are not driven by cost which the participating countries committed to a but by scarcity, and these hover always far above the 50 percent reduction goal up to 2050, to the ludicrous extraction costs. That is even now the case, in the proclamations of the German Left Party, who want midst of the dramatic fall in prices triggered by the to reduce emissions by 90 percent by 2050, policies current economic crisis. With oil prices slightly below follow the same pattern. The largest reduction 60 dollars per barrel, the extraction costs including efforts are to be made in the far future, while the cur- exploration in the Gulf (but not mining rights, which rent generations are largely spared. Politicians can- are part of the profit) amount to around one to one- not do otherwise, alas, as they do not want to inflict and-a-half dollars, and even the extraction of the the pain of immediate reductions upon their voters. Canadian tar sands costs, including exploration, no The year 2050 is so far in the future that the boldest more than 15 dollars. In due course, fossil fuel prices policy proposals can be made now without scaring will steadily increase as the resources become voters off. After all, the onus will fall later on other scarcer. At the same time, extraction will progress in citizens and other politicians who will have to tight- the direction of increasing extraction costs, as en their belts. The consequence of this delaying poli- resource owners save interest costs by beginning with cy is that the resource owners will move forward the the sites that are more easily accessible. Presumably, extraction of their resources. The quantities that the however, there will never be a point when extraction politicians announce for future restriction spring costs overtake product prices – or even come near from the ground all the more copiously today. them. An environmental policy based upon pushing prices below production costs would need a big ham- An environmental policy subjected to the con- mer. Marginal measures as those currently in force straints of democratic discussion and that limits itself are plainly insufficient for that purpose. to influencing the demand for fossil fuels cannot per- suade resource owners that the price of their prod- This is just as well so, as the argument for perma- ucts will be less affected in the far future than now or nently sealing off part of the resources still in situ to in the near future. On the contrary, the resource 11 CESifo Forum 3/2009 Introductory Debate owners will be plagued by the fear that, as the plan- such a Super-Kyoto system, given that it has been et becomes warmer and the resulting climate dam- working intensively towards such a goal for several age more apparent, this policy will be tightened up years. But it will probably fail again, as the road to an even further. As a result, it can hardly be expected all-encompassing consumption cap is still far away.